Think of riding a bike on a flat road. You are travelling along quite serenely towards your destination without too much effort. Now imagine the road starts to incline gradually at first, then quite steeply, and finally it starts to feel like you are cycling a mountain stage of the Tour de France! Pension planning is very similar. The earlier you start in life, the flatter the road!
Take the table below. This gives an idea of how much you might need to contribute each month to a pension to receive an annual level pension of £15,000 in today’s terms (inflation adjusted at 2.5%) at 65:-
|
Age Now |
Net Monthly Premium |
|
35 |
£664 |
|
40 |
£800 |
|
45 |
£1,000 |
|
50 |
£1,320 |
The message is clear. The earlier you start saving the better for you in the longer term. The amount of contribution may well surprise many also. Even at 2.5%, keeping pace with inflation can be daunting.
Most people do not target an income in retirement but contribute to a pension at a level which they can afford. The following example assumes a level contribution of £400 net a month and shows the difference in income at age 65:-
|
Age Now |
Pension Income |
Reduction In Income |
|
35 |
£9,010 |
N/A |
|
40 |
£7,490 |
-17.0% |
|
45 |
£6,010 |
-33.3% |
|
50 |
£4,530 |
-49.7% |
As you will note the delay in commencing pension planning can result in considerable reduction in retirement income.
Notes
1. Tax relief on contributions assumed to be at 20%. 2. Pension income calculated with 50% spouse’s pension (3 years younger) and 5 year guarantee. 3. Growth investment rate utilised pre retirement of 2.4% (after taking into account 2.5% inflation). 4. State Pension entitlement ignored. 5. Tax free cash entitlement ignored. 6. Source for statistics: Scottish Widows, Consensus fund, nil advice fees.
A review of your pensions could highlight areas to be addressed rather than being blissfully unaware of any shortcomings in retirement provision.
It’s never too late so what are you waiting for?